Business and management

Merging drinks makers

Two Scottish plays

WHEN mergers involving Scotland's two national drinks happen within a week of each other it counts as an odd coincidence. It may also hold a lesson for the way the world is going, at least for makers of branded consumer goods.

The grander transaction is the £1.3 billion ($2 billion) acquisition by Diageo, owner of Johnnie Walker whisky, Smirnoff (pictured, on a shelf at a liquor store in New Delhi) and other global brands, of a majority stake in USL, India's biggest maker of spirits. The merger between AG Barr, maker of a fizzy beverage called IRN-BRU, "Scotland's other national drink", and Britvic (Robinsons Barley Water, among other things) is a humbler affair, but only by comparison. Barr Britvic will have sales of about £1.5 billion, making it one of the biggest soft-drinks companies in Europe.

The two deals do not have much in common besides the Scottish connection but they make a telling contrast. The Diageo acquisition exemplifies the march of global branded companies into giddy and perilous emerging markets. It follows last year's acquisition of a majority stake in China's Shuijingfang, a maker of white spirits. Britvic Barr seems to illustrate another trend: consolidation in the slow-growing developed world, especially Europe.

Diageo's takeover of a majority of USL is a boost for Vijay Mallya, a flamboyant tycoon who is also trying to keep afloat his struggling airline, Kingfisher. The potential looks vast. Whisky (or something vaguely resembling it, drunk with plenty of ice and soda) is the favourite intoxicant of the Indian elite. Deep-pocketed Diageo can afford to invest more in marketing than can Mr Mallya. Pernod Ricard has recently outclassed USL at the top end of the Indian market; that may now start to change.

The second big opportunity, says Trevor Stirling of Bernstein Research, is the "option value" on an opening of India's market to foreign manufacturers. If India ever chops its high tariffs it will become big market for scotch. Some Indian families already display their Johnnie Walker bottles in shrine-like nooks. Diageo is thus poised to profit if trade barriers fall.

Barr Britvic looks like a more defensive alliance. The two companies tout their "complementarity": Britvic's big distribution network will expand IRN-BRU'S reach and more Scots will presumably now chug Robinsons and Tango. The merger has the blessing of Pepsi, which licenses British bottling and distribution of several drinks, including Pepsi and Gatorade, to Britvic. Britvic's shareholders will own more than 60% of the merged company but it is in some ways a junior partner. Britvic has stumbled recently, with an expensive recall of its Fruit Shoot children's drink (the caps were faulty) and an unrewarding foray into Ireland. The combined operation will be headed by AG Barr's CEO, Roger White.

Barr Britvic has international ambitions but its main hopes rest on wringing efficiency and growth from its old-world operations. That is the future for many regional brands (often in the hands of private-equity owners). Diageo is reaching for bigger prizes.